Earnings Transcript for 4755.T - Q4 Fiscal Year 2022

Operator: Good afternoon and thank you for joining Rakuten Group’s 2022 Full Year and Fourth Quarter Financial Results Meeting. We have disclosed the latest consolidated financial report at 3

Hiroshi Mikitani: So this time, again, online streaming, so I would like to make a brief explanation through the online streaming. And so FY 2022 fourth quarter and FY 2022 full year consolidated financial results of Rakuten Group to be presented by myself. So starting from summary. And first of all, domestic business and overseas business, I would like to explain one by one. In the domestic EC GMS, so globally the COVID seems to be over. So the EC companies have been struggling. However, our company is plus 12.3% Y-o-Y and this is about JPY5.6 trillion and particularly, Rakuten Group. So we are very neutral. In other words, during the COVID, we were not able to travel, but the e-commerce business performance was pretty well. Once the COVID is over because people started to move and the Rakuten Travel and Rakuten Card business performance gets better. So, we have a quite well-established ecosystem. And as for Rakuten Travel, comparing to ‘19 plus 12.9% Y-o-Y, so even comparing to pre-COVID, we have been growing our business in travel. And the subscribers, MNO and MVNO in total, 5.06 million and I will elaborate mobile later. And the Rakuten Card shopping GTV drastically grew and the Y-o-Y basis, plus 25.8% and this is JPY18.2 trillion. We have achieved to that level. So, it says Rakuten Card shopping GTV but why do we have direct securities in our accounts? Oh, this is the card issuance. The number of card, it’s not GTV. Our card issued is plus 11.9% Y-o-Y. That is 28.08 million. And the Rakuten Securities general accounts, plus 21.1% Y-o-Y. In a non-consolidated basis, this is a top growth rate. In the Rakuten Bank, the number of accounts is 13.39 million that is plus 13.3% Y-o-Y growth. So last year with 25th anniversary of our company and in 1997, Rakuten Ichiba started its operation. From there, cumulatively on average, every year, CAGR, plus 56.9% we made. In the last year, as for GTV, 14.6% grew we made. So 26 of the term in consecutive manner, we have increased our top line. And the global GTV, so plus 39.2% starting from 2000 and over 23 years, it is growing. In the last year, it would slip JPY33.8 trillion and Y-o-Y basis, 23.0% growth. And the presence in Japan and the presence in global market and based on the consolidated revenue among the Internet companies, we are overwhelming number one. And even if we look at ourselves from the global point of view, excluding U.S. and China, we are – the revenue and the scale wise, we believe we should be number one. So now, still the economy is unstable and a global point of view, Internet business, including advertisement revenue had been struggling, that’s what we heard. However, Rakuten mainly on the shopping and then the consumers – we are very close to consumer’s wallet. So the last year Q4, it was plus 16% and 2022 revenue was JPY183 billion. So we are about to reach JPY200 billion. So we still have a room to grow and who is supporting this is Rakuten ecosystem here in Japan. So this is the ecosystem. Well, the number of unique users is 39 million. And in a month, more than 39 million people have been using our service. This is plus 11.2% Y-o-Y. And then those loyal customer using more than two services is 75.6%. So one of the factors of this is Rakuten point attractiveness and you can save it and you can use it and you can have fun. So the last year throughout the year, about JPY620 billion, Rakuten Super Point was issued. So, this lapse rate is about 2% means everyone is enjoying using this point service. And the aspect of this is SPU and Rakuten Mobile now joined this SPU and it’s a big growth factor today and average growth rate is plus 22%. So as an ecosystem, we have quite a strong powerful ecosystem here. And then what about the membership value, what about the membership value? So far, we have been showing this membership value data as of last year and it’s about JPY8.3 trillion and this is plus 28.6% Y-o-Y growth. And then the membership value, how do we calculate that, so either generating the profit current value LTV. From LTV, we exclude the CAC and then number of active users, were multiplied to that. So, the customers generating the profit to be calculated into the present value, which is about JPY8.3 trillion on a profit basis, this is how we calculate membership value. And then these are the member value is getting closer to market cap is what we want to do. And particularly, mobile user I may not subscribe, but contribution is becoming great now. For example, Rakuten Super Sale and the GMS from MNO subscriber is about 25%, getting closer to 25%. And then this time, Rakuten Mobile joined this SPU. So we have to be aware of that and the customers understand that. And because of having this system, they joined MNO subscriber, which is 22%. This is fair. And then economically good pricing plan and then ecosystem started to work in this arena. And then about the paid subscriber, the growth accelerating. So we paid back the point and now it’s finished. So now our users are paying to our subscription. As a result, as of end of January, actual number of paying subscribers is about 4.5 million. And comparing to year before, it’s plus 294%, which is 4x. And then new MNO applications up until November, we had some termination period for the fleet use, but we strengthened our ecosystem and then in December, 5%. And then January this year, comparing to the year before, plus 16% growth was made. So it shows a steady growth in the Rakuten Mobile users number is recovering steadily. And then the global KPI – global GTV is plus 23% Y-o-Y and JPY33.8 trillion. And the reward, this is a cash back side. This is a 5.6% growth Y-o-Y, which is equivalent to $12.07 billion. So this is another performing thing and the brand recognition and then the – I will show you the TV commercial, which was shown at the Super Bowl, I will show it later. And then the Kobo registered users plus 8.1% Y-o-Y and then the Rakuten TV, mainly in the European market and the total users is 70 million, which is plus 48.3% Y-o-Y. And then the content distribution to the global market, which is Rakuten Viki and the number of registered users, it’s 66.8 million, which is plus 27.2% Y-o-Y. And the Viber from economic point of view, because of the Russia-Ukraine dispute, this became the deficit from the profit, but the number of registered users is still growing by plus 6.4% Y-o-Y. Let me go one by one. The first one is Rakuten Rewards. Revenue, so this is $990 million and this is plus 13.3% and non-GAAP operating income is $62.8 million or the plus 12%. So it’s showing steady growth. And then we are aggressively in terms of the marketing so that we believe we can grow profit some more extent. And now – so this is a kind of video, Rakuten America at the Reward Super Bowl. This was shown there and this is the TV commercial. And then on YouTube, about the 30 million, the view was made for this video, so I would like you to enjoy the video. [Video Presentation]

Hiroshi Mikitani: Okay. So the Rakuten brand recognition is being accelerated in Taiwan and Europe already above the 80% and in the United States, close to 70%. The people know Rakuten brand and maybe with this TV commercial for Super Bowl, we believe this number will be improving. So I would like to go deeper into different business segments and talk about the performance. So, starting with Internet services, there are four segments here. Domestic EC is first, JPY797 billion is the revenue and operating income, JPY95.6 billion, so very steady. It doesn’t mention the unit, but it’s JPY1 billion. And minority investments, last year, there was this major profit coming from investment because of the market condition, it’s a deficit of about JPY10 billion. So minus JPY44.6 billion year-on-year basis, but practically, for Internet Service segment, things are going quite well. And then domestic e-commerce GMS JPY5.6 trillion year-on-year basis, plus 12.3%. And in the near future, we would like to reach JPY10 trillion and one major measure for that is Rakuten Mobile. Domestic e-commerce financial highlights, let’s look at the revenue. About JPY800 billion in EC, it’s going to reach almost JPY100 billion. So this is 36.6% growth year-on-year. And so for the total amount, GMS, and although we have not announced this publicly, we are actually doing better than other companies. And one key factor is enhanced the royalty. And I think we have this threshold for free shipment and also enhancement of services, among others, we have paid our – made efforts to make improvements. For different sections of our business fashion, for example, Rakuten Fashion, we have been exerting a lot of effort in and ZOZO one of our competitors. Compared to them, we are about 2.5x of ZOZO. So we have surpassed JPY1 trillion already, and the growth rate is 10% or more year-on-year. So very steady and domestic EC. In various sectors, all e-commerce is to be carried out or handled by ourselves. And so we have core businesses as well as growth investment businesses. So two major categories. For core business, we have Rakuten Ichiba, Rakuten Travel and others, cash back, Rakuten Rebates and GORA. And investment growth in the businesses includes Rakuten Seiyu or Netsuper, and Rakuten Rakuma and Fashion. And when you go into the details for the core business portion, you can see a steady growth here. On the other hand, when you look at the growth investment business, it’s actually an improvement of about JPY9.1 billion compared to before, and so we are growing what has been growing. And also for deficit-making businesses, we’re turning them to the blog. And it is about to reach JPY150 billion in non-GAAP operating income. So I think there is a room for growth. And so 2020 sales is JPY183 billion, and that is plus 15.9% year-on-year. And FinTech, Rakuten Card, Rakuten Bank, Securities Business as well as Insurance Business, they are making improvements in operating income, so very steady. And on a per segment basis, plus 10.8% year-on-year and the key highlights include the following

Tareq Amin: Good afternoon. Rakuten Symphony is a platform company. We are young, but we are making extremely healthy revenue growth. If you look at the last six quarters since our establishment, we have achieved more than $0.5 billion in total revenue. And for fiscal year 2022, our total revenue was $476 million. But we are not stopping here. If you look at the growth in 2023 and what’s beyond, we have a very healthy sales pipeline with over $4 billion of total revenue – or total opportunities that we are pursuing, and our sales team is working hard to convert these opportunities into revenues. Today, in fact, we have closed 14 global contracts are closed and our team is in delivery phase. Eight global contracts are in final stages of closure, and we can’t wait to convert those into real revenue opportunities. And if we look at the technology that Rakuten Symphony has, the technology that was created, thanks to Rakuten Mobile. We see unprecedented demand in three big verticals in which Rakuten is an industry leader. Number one, Open RAN. In fact, Rakuten is the company that really drove the architecture evolution of Open RAN, a very critical technology to change the cost of building and engineering and managing telecom infrastructure across the world. We are absolutely the world leader in this technology. We see a significant opportunity that is translating from proof-of-concepts in both brownfield and greenfield operator. Cloud, we are in fact today, the largest edge cloud platform provider if you consider the number of workloads deployed in our infrastructure. And then last but not least, efficient operation. And if you look at all of these in total addressable market and the size of this market, it is significant, and that’s why we are very, very excited about the opportunities in front of us in the near future. And when I – specifically about Open RAN, this is a topic that I think the industry as a whole debated for a very long time. And when I look at Rakuten and what we have achieved, especially in the mobile business in Japan, we now have recognized over $200 million of total revenue since establishment as a new start-up in an area that is highly contested, I think this is a significant progress in this architecture. In fact, we are the only real alternative to legacy platform deployment across the world. With over 300,000 sales on year globally, it officially makes Rakuten the world’s largest Open RAN software platform provider. This is very, very healthy to see for us as far as opportunities is concerned. Open RAN provided amazing agility to provide new features and advancements for mobile operators as well as consumers. With over 600 features continue to develop and evolve, we think our architecture, our feature reliability, our feature quality is matching what the customers are expecting. So with this, what is our objective now in 2023, we have to flawlessly deliver to our customers, the 14 global customers that we have already signed contracts with continue to expand and really create a win-win opportunities for both to monetize this marketplace. We want to achieve a 40% revenue growth in the calendar year 2023 and truly set our self as a true platform connectivity player equivalent to what you have seen with AWS and Amazon when they launch AWS initially. And we think Rakuten is the only company that is uniquely positioned to deliver on this promise. And with that, thank you very much.

Hiroshi Mikitani: Thank you very much. So, we have been talking about the each business strategy, last not but least, I would like to talk about the financial strategy. So, the first point is about the funding. We have been investing a huge amount of the funding to the Rakuten Mobile business and the finance business has become gigantic. So, this interest-bearing debt amount is increasing. So, my first point here is the Rakuten Bank’s IPO, this was already announced. It’s on process and we would like to work on that. And then next one is Rakuten Securities Holdings’ IPO. Before the end of this fiscal year, we plan to make that happen. And other than that, parent company and subsidiary, the company based strategic business alliance and capital, the range to be flexibility considered so that we will be able to have a healthy balance so that we can grow in the Rakuten Mobile’s profitability, the structure improvement is what I have already covered before. Finally, I would like to talk about sustainability. At Rakuten, with regard to sustainability, we are taking this very seriously. And so JPY33 trillion is the GMS. In other words, Rakuten Group’s platform is the platform through which a lot of business deals or purchases are made. So, sustainability of society is something that we own. We have this ownership and we think that we need to put a lot of importance on that. And as a corporate mission, we see sustainability as a very important piece. And we have subcommittees established to evaluate these different parts Environment, Human Rights and Diversity and Inclusion. So, we have relevant subcommittees to come up with specific action plans. And promoting that it’s not limited to Rakuten Group, but it is through partnerships as well as with users, it’s a collaborative effort that we are going to make in this field. For example, Rakuten Travel, we will look at environment and other sustainability elements of clean energy and promotion of traveling is one and also enhancement of user awareness is another aspect. And so quizzes might be given or donations might be solicited using Rakuten points as well. So, we would like to make certain efforts there. And as a result, in sustainability indexes, Dow Jones Sustainability Indices is including Rakuten. And also as for awards, fortunately, we have been receiving a lot of awards. We are very grateful. And I would like to give financial highlights here. As you can see here, Internet Services segment, Domestic EC at the center, very steady performance and for FinTech, operating income, plus 11% approximately. And Mobile segment, as I mentioned, the first phase required a lot of investments and costs. However, in 2023, this year, we are taking various measures to reduce costs and also marketing methods are using Internet as much as possible. And as a result, roaming cost is coming down. These measures is taking – well, making – getting fruits in 2023. And then as we reach this stage, then of course, we will consult with the market as to what next steps we will be taking going forward. But in any case, for year 2023, Rakuten Mobile financial situation will dramatically improve and we will actually conduct marketing to the masses. But we are not going to really go after users who are favoring free services, but rather focus on the subscribers that are loyal to us to ecosystem overall as well as Rakuten Mobile so that we can have a sound growth going forward. So that is the direction in our policy. Thank you very much for your attention.

Operator: This concludes our 2022 full year and fourth quarter financial results presentation. Thank you very much.